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Eskom tariff hike will speed up utility death spiral - chamber

Oct 31 2017 12:29
Carin Smith

Cape Town - If the National Energy Regulator (Nersa) grants Eskom the 19.9% tariff hike it has applied for, it will simply enhance the utility death spiral it faces where users move to renewable energy alternatives.

This was the message from the Cape Chamber of Commerce and Industry at Nersa's public hearings on the Eskom tariff hike application.

Figures from Eskom’s own annual reports show the utility’s average selling price has increased from 18 cents a unit in 2007 to 89c in 2017. The new increases would result in an average selling price of R1.07 a unit. This means that Eskom tariffs have increased nearly fivefold in 10 years, according to the chamber.

"Many electricity users - both for domestic and business use - will opt for alternatives like renewable energy. The decline in Eskom sales requires a simple understanding of the demand curve. When electricity prices go up, demand decreases, because the domestic user is already under immense financial pressure," Sid Peimer, executive director of the chamber, explained to the Nersa panel.

To avoid the so-called utility death spiral, Peimer said Eskom should cut expenses, no matter how painful that process will be, including leading to job losses.

'Medicine must be swallowed'

"Cutting costs is always painful, but it serves a purpose. There comes a time when medicine must be swallowed, no matter how bad it tastes," said Peimer.

"Eskom’s spending on consultants like Trillian and McKinsey is (at) far from acceptable levels. Paying R30m after 18 months' work is not acceptable. Furthermore, it costs Eskom goodwill and credibility – much of which has been eroded in recent times."

On top of that, Eskom received a qualified audit report reflecting irregular spending of R3bn.

"The reasons for the increases are difficult to understand. In 2007 Eskom spent about R10bn on coal. In 2016 it spent R48bn on coal to produce and sell less electricity. During this time, the World Bank spot price for South African thermal coal in dollars actually decreased marginally after sharp price spikes in 2008 and 2010.

"Clearly, something is desperately wrong," said Peimer.

In his view, the best way to try and escape the death spiral is the radical transformation of Eskom's business model.

"Eskom has a trust deficit. What is needed is complete transparency on all Eskom’s input costs. The chamber submits that Nersa cannot determine a fair tariff hike without all the detail suppressed by Eskom being made available," he said.

"Eskom should recover the billions in irregular spending and sell certain assets like power stations to investors in order to separate power generation from the sale of power," said Peimer.

"The Cape Chamber of Commerce and Industry believes it would be counter-productive to approve Eskom’s application for a 19.9% increase in its electricity tariffs and a 27.3% increase in tariffs to municipalities. To grant these huge tariff increases would simply accelerate the pace of the utility death spiral."

Another presenter, Etienne Vlok of the clothing and textile union SACTWU, explained to the Nersa panel that the clothing industry is labour intensive and, therefore, a good job creator. Yet, despite positive interventions by government, the industry is again experiencing increased job losses.

In Vlok’s view, the proposed Eskom tariff increase will just compound the challenges in the clothing industry, tipping many textile companies into "freefall" if Eskom is granted a tariff hike of 19.9%.

"Eskom is an SOE (state-owned enterprise) and not doing what it should be doing. Its request for a tariff increase is shaking public and investor confidence further instead of satisfying stakeholders that SOEs and the economy are in safe hands," said Vlok.

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